|THE WOOD PROCESSING INDUSTRY IN VIETNAM|
Note: This article has been reprinted from the Ministry of Foreign Affairs in Denmark.
In the past few years, Vietnam’s wood and furniture industry has experienced a very positive development. Exports have grown significantly and Vietnam now finds itself as the second largest exporter of wooden goods in Southeast Asia.
Vietnam’s wood and furniture industry has grown tremendously the past few years. In merely 4 years, the industry’s total export volume rose by 300% from USD 460.2 million in 2002 to USD 1932.8 million in 2006. This makes Vietnam the second largest exporter of wooden goods in Southeast Asia. Furthermore, the wood processing industry has become an important industry in Vietnam, as it is today the fifth largest source of export earnings in Vietnam. In the US market, furniture has in 2007 overtaken footwear to become the second largest export item after apparels.
With Vietnam’s macro-economical stability, low labour costs, quality craftsmanship, highly adaptable work force, and its WTO membership, the country has become a very attractive sourcing destination, and indeed an excellent production centre for furniture.
Products and production facilities
The furniture industry in Vietnam is to a large degree dominated by the production of outdoor furniture. However, the demand for indoor furniture is quickly growing and production in this category has grown to satisfy the demand.
The Ministry of Agriculture and Rural Development has in 2007 registered 1500 medium-sized and big companies within the wood processing industry, 30% of these are state owned or Joint Stock companies, 60% are private owned while the remaining 10% are foreign owned companies and joint venture companies. An important notion to keep in mind, however, is that across Vietnam there are hundreds of thousand small woodworking manufactures that are not registered.
Production concentration is seen in Quy Nhon and in Binh Duong Province near Ho Chi Minh City. Only 150 companies are based in the Northern Vietnam.
Among the Danish companies operating in the wood processing industry in Vietnam are ScanCom and TROPIC DANE.
Exports growing rapidly
Vietnam has in the recent years experienced a strong development in the industry and significant growth in the export turnover. The chart below illustrates the development in the country’s export volume.
Although the value of the export volume has risen with more than 300 percent from 2002 to 2006, the quantity of the export only rose with 50 percent in the same period, thereby implying an increased demand for Vietnamese wooden goods on the international market and of their growing competitiveness.
Vietnam currently exports to more than 120 countries worldwide. The three largest markets are the US (USD 744 million in 2006), the EU (US 500 million) and Japan (USD 286 million). The remaining exports went to markets in Australia, New Zealand, South Africa, and others.
Vietnam’s outdoor furniture are predominantly sold on the international markets, while the indoor goods are to a large degree sold on the domestic market. They are most often sold to hotels, offices and building projects were everything from wooden floors, window panels and kitchen cabinets are ordered.
Furthermore, Vietnam is slowly experiencing a larger upper and middle class Vietnamese, who with a growing economy, can afford to buy indoor wooden goods, such as wooden doors, floors, furniture and kitchen cabinets for their homes.
Shortage of raw materials
Around 70-80% of the raw material used in the woodworking and furniture industry are imported. Vietnam has scarce resources of forest areas with timber for manufacturing use. Illegal logging as well as land clearing for housing and agriculture has limited Vietnam’s resources of natural wood and has led to strict government regulations on lumbering.
Today, Vietnam has a forest area of 16.24 million hectares, of which 9.04 million hectares can be used to plant trees for industrial use. Most of these hectare lands are not in use, as they are situated in areas not suitable for plantation.
In 2007, the government approved a new plan, the Vietnam Forestry Development Strategy 2006-2020, in which the need for importing raw materials will fall drastically. It is expected that the quantity of raw material lumbered a year will amount to 20-24 million m3. A very significant increase in comparison with today’s yearly amount of raw material, 1.5 million m3.
The lumber from Vietnam today is of rather low quality which forces the manufactures to import their raw materials. Most of these are from the neighbouring countries Laos, Cambodia, Malaysia and Indonesian, but also largely from the US, Southern America, New Zealand and other places.
The imported wood are oak, pine, eucalypts, and peach among others.
It is estimated that around 90 % of the imported wood to Vietnam are FSC-certified.
Challenges for the industry and Danish Companies
The basic challenge for the Vietnamese woodworking industry is to improve the product quality and hence the value added potential. Several issues are important to address if this challenge is to be overcome and foreign companies looking to invest in the industry should be aware of these and the business opportunities as well as challenges that they give rise to.
First of all, the issue of shortage of raw material as mentioned above. In the foreseeable future raw materials will have to be imported to Vietnam. A special challenge is the sourcing of accessories such as knobs, hinges, and slide bars. High quality items will often have to be imported although the ongoing developments within the metal industry in Vietnam might improve the supply for the furniture production in a few years.
Secondly, the machinery in use is very often not fully up to date. The worn machinery is often from China, Taiwan, Japan, Germany, Italy, and from the local market. Not all companies can afford advanced machineries and many of them are bought second hand.
Thirdly, Vietnam lacks design expertise. Most furniture is produced based on customer provided designs. However, illegal copying is still a common phenomenon in Vietnam and the issue of design protection has to be addressed by manufacturers looking to outsource production. There are laws against on copyright in Vietnam, but it is, however, difficult to prosecute the accused. Seeking design patent is possible, though the process is long and to date only a handful of companies in the industry have design patents.
Lastly, Vietnam has an abundant labour force. However, the number of skilled labour, incl. for management positions, are limited. Concerns regarding vocational training are being addressed and schools are built to educate more skilled workers for the industry. Many industries in Vietnam face this human resources issue and the woodworking industry is no exception.
With an existing global demand for lower cost furniture and other wood products, an abundant and inexpensive labour supply, a fairly good infrastructure in place in the areas with high concentration of furniture production, and easy access to global shipping and sourcing of materials and supplies, the prospects of the Vietnamese furniture industry look promising. It seems that the only aspects lacking in the industry are know-how and investment capital.
In this context, Danish companies could benefit from involving themselves in the upgrading of Vietnamese counterparts, either as suppliers of machineries, direct business partners or investors.
The latter options provide interesting opportunities for synergies, as Danish furniture companies generally possess skills within the areas of design, technical skills and quality control, while the Vietnamese counterparts can provide skilled, inexpensive labour eager to learn from foreign partners.